Hugh Lenon's Speech at Edinburgh Regional Dinner

Ladies and Gentlemen, good evening. I am Hugh Lenon, from Phoenix Equity Partners, and it is my privilege to be the BVCA Chairman. Welcome to everyone particularly those who got here despite BA strikes, volcanic ash or anyone who had assumed that the new Edinburgh tram would by now be fully functioning. I would especially welcome our guest speaker, Ian Robertson, a legendary rugby personality. I look forward to introducing Ian fully a little later on.

 I would also like to thank our sponsors. First, Langham Hall, which is very generously supporting the BVCA not only  tonight but also at our next four dinners. My thanks also to  Sterling Financial Print Services, for its long term support.

It is a great honour to be here in Edinburgh. The UK may no longer have a Scottish Prime Minister but we all spotted that David Cameron decided to visit the Scottish Parliament before he visited Westminster.

It is also a pleasure to be at this magnificent venue. It was known as the North Britain Hotel until the mid-1980s, re-opening as the Balmoral Hotel after renovation. Its owners no doubt hoped to capture the wealthy American tourist market. That act of rebranding and renaming was a triumph of marketing and spin worthy of any political party in that while the rooms in this hotel do have some truly remarkable views, that of Balmoral Castle, a mere 115 miles away , is quite definitely not one of them.

Talking of political parties, we have just come through perhaps the most extraordinary 40 days in modern political history. The election campaign was dominated by novelty.  First we had the debates and second the remarkable strategy of insulting a voter. My political friends tell me that Labour's greatest fear, when Gordon Brown was pictured hearing the 'bigotgate' playback, was that he would start to put his head into his hands - and miss.

South of the border we are not used to the idea of the fun really starting after the election results are in - but that is, of course, what happened. I am talking about the Dave and Nick show. We certainly have to hope it beats the Rainbow Coalition - aptly named on the basis that, like rainbows themselves, this one would have lasted no more than minutes.

Of course, Scotland is much more advanced and is used to such alliances  but for the English it was like being compelled to witness open-heart surgery. I shall return to talking politics later but first can I touch on our industry.

The vast majority of my 25 BVCA predecessors have been able, on occasions such as these, to reel off wonderfully positive statistics reinforcing the image of an industry in rude health. Overall, however, the last year was not, on the face of it, so strong for UK private equity and venture capital.

Fundraising fell by 90% from £23b in 2008 to £3b in 2009. UK investment in new portfolio companies fell by 70% from £8.5b to £2.5b. Proceeds from the sale of portfolio companies fell by 65% from £11b to £4b - and 27% of those realizations were write offs and receiverships. In terms of the performance of portfolio companies, the BVCA announced yesterday that our industry delivered a return of plus 1% to fund investors in 2009 compared to plus 30% from the stock market. When my wife read these stats in my draft speech for tonight she asked me what on earth I'd been doing all year!

The good news, however, is that the long term performance which we also announced yesterday shows that we outperform all other indices. Our industry's 10 year annual return is 13% compared to the stock market return over the past 10 years of 1% per annum. This is a critical reminder of what we here all know, namely that PE and VC is indeed a profitable but long term business.

Despite 2009, your Chairman is a natural optimist. Our industry has over the past 30 years demonstrated its ability time and time again to adapt and thrive, and I am sure it will do so again. A close analysis of the performance measurement survey shows that quite exceptional returns have been generated by those who were brave enough to invest in the early 90s and early 2000s when, like now, the outlook seemed uncertain. I am sure an equally exciting opportunity now presents itself.

 And here in Scotland, there have been some particularly great results which keep me particularly positive. For example, last year saw Charterhouse acquire Wood McKenzie, a specialist provider of research and consultancy services in the energy sector, from Candover for more than £550 million. It was fabulous investment with management and Candover virtually doubling Wood McKenzie's employees and more than doubling revenues.Many congratulations to everyone involved.

In 2010, there have already been a number of smaller deals. Perhaps the most interesting is LDC's backing for Subocean Group, the first deal completed by LDC since opening offices here in Edinburgh and in Aberdeen. Subocean will use this investment, it is bravely predicted, to double the size of the business in the next few years, with the aim, of reaching a turnover of £300 million by 2014. These are  classic examples of the immensely positive part that private equity and venture capital can play in the UK's economic revival  if politicians in Whitehall and Brussels will let us do so. Here I return to politics.

We have no  option but to accept that public sector debt and the annual deficit need tackling head on. The national medicine needs to be stiff. Whilst Gordon seemed to be happily married to Prudence, we now know that in the end Mistress Profligacy was for him altogether more tempting.

So like it or not tax rises are now inevitable. And we must do our bit. But these must be intelligent rises, not those that stifle innovation, send our entrepreneurs and brightest brains overseas, and damage growth prospects. The new Coalition Agreement refers to "taxing non-business capital gains at rates similar or close to income, with generous exemptions for entrepreneurial business activities". What does this mean? Does this include us? We believe it should and we will argue our case.

Also, whilst we understand the need to raise tax, it may well be that a rise in CGT would not raise the money expected from it.  Recent history is instructive. When the Government last increased CGT in October 2007, collection of CGT fell by 53%.

There is another point. Might a CGT rate rise send the signal that Britain is hostile to business? Remember, in many countries the CGT rate is very low (in Holland and Switzerland for example, the rate is zero). So even a relatively small rise, let alone to 50 per cent, would make  British CGT rates the highest in the developed world. Why should entrepreneurs take all the risk and the government take up to half the rewards?

What matters for the government is not the tax rate but the tax take. Good entrepreneurs are mobile and we want them to stay here in the UK. This is an argument which the BVCA  has made forcefully, and will continue to make in the months ahead. Having talked about tax for 2 minutes I risk testing your patience further by talking for 1 minute about regulation. I am actually more immediately concerned about regulation than tax, especially the draft EU Alternative Investment Fund Managers directive about which you have heard much - probably too much - already.  Nick Clegg may be canning the DNA database and ID cards - perhaps he should turn his sights on Brussels as well?

In short, provisions which were confirmed in Brussels on Tuesday would impose wholly  unreasonable compliance costs  on small businesses. For example, as things stand, it is possible that small private equity backed businesses - those with only 50 employees - would need to incur considerable cost each year in making a whole series of disclosures which arguably benefit no-one.  The Directive looks politically motivated against the Anglo Saxon business model and the BVCA continues to fight its worst elements - for example the 50 employee threshold. I would urge you all to support the BVCA in its efforts.

Let me draw to a close on an upbeat note and talk again about the strengths of our industry's portfolio companies. Last year we recognised their achievements through a new set of awards, the CEO Awards. Some of the winners in this region - Fishers, Wood McKenzie, Letts Filofax, and  Melrose - are here tonight. This year a successor, the BVCA Portfolio Company Management Awards, have been created. Nominations close very shortly and I would encourage as many entries as possible. It is vital we use such awards to celebrate and to emphasise the central role we play in the economy. Now is not the time to be shy about our successes.

Private equity and venture capital are ultimately about individual flair and collective teamwork. This is true for sports, especially Rugby, which Ian Robertson has covered so compellingly for so many years. You will have the pleasure of hearing from him later on.

My own remarks are now at an end and it is time to eat and drink. Thank you for your attention and I hope you enjoy dinner. Thank you.